According to a recent analysis, the path to housing affordability doesn’t necessarily require a market crash but rather a combination of stable price growth and moderately lower interest rates over the next several years.
The report from Redfin Senior Economist Asad Khan, defines “normal” housing costs by using July 2018 as a baseline, when the national median monthly mortgage payment-to-income ratio was 30% – a widely recognised benchmark for housing affordability.
If mortgage rates fall to 5.5% from current levels around 6.7%, annual household income growth remains at 3.9%, and home prices grow at current rates of 1.4% year over year, housing costs nationwide would return to normal by November 2030.
Under more optimistic scenarios where home prices remain flat, normal affordability could return by January 2029, while a 2% annual price decline could accelerate normalisation to November 2027.
The timeline varies significantly across major metropolitan areas.
In San Francisco and Oakland, housing costs have already returned to normal levels relative to 2018, though this doesn’t mean homes are affordable in absolute terms.
Sixteen of the 50 most populous U.S. metro areas could see normal housing costs within five years if current price and income growth trends continue and mortgage rates fall to 5.5%.
This number drops to 11 metros if rates remain at current levels.
Tech-driven markets are showing the most promising paths to normalisation, according to Mr Khan.
“Tech-driven metros like those in the Bay Area, along with Austin, Seattle and Denver are seeing wages grow considerably faster than the national rate of 3.9%,” Mr Khan said.
“At the same time, home price growth in these metros has cooled considerably from pandemic peaks.”
However, the outlook isn’t positive everywhere.
Half of the top 50 most populous U.S. metro areas will not return to normal housing costs within the next decade if home prices continue growing at their current rate, even with lower mortgage rates.
These challenging markets include many Midwest and East Coast cities where home prices are currently growing faster than the national avera,ge while household income growth lags.
“This year we’ve seen faster price growth in Midwest and East Coast markets, which makes them less likely to return to normal housing costs soon if we assume those growth rates will continue,” Mr Khan said.
“The housing market is constantly evolving, and today’s trends may look very different by 2030.”
The analysis uses the mortgage payment-to-income ratio as its primary measure, assuming a 20% down payment on a 30-year mortgage with property taxes and insurance included.
“The path back to normal housing costs doesn’t require a crash in home prices, stability may be enough,” Mr Khan said.
“Buyers shouldn’t expect affordability to snap back overnight, but the trend lines point to real progress within this decade.”
